The New Overtime Rule: Are Your Business Clients Ready?

In July 2015, the U.S. Department of Labor (DOL) proposed changes to the Fair Labor Standards Act (FLSA) that would substantially overhaul overtime pay rules.

The proposed changes more than double the salary threshold that helps determine whether workers are eligible for time-and-a-half pay when working more than 40 hours per week. If finalized, these changes will make nearly five million workers eligible for overtime pay as early as this year, unless their salary is raised.

In March 2016, the DOL submitted the proposal to the Office of Management and Budget (OMB) for review. The OMB could approve the rule as is or ask the DOL for changes. The final rule could be issued as early as later this month; once final, employers will likely have 60 days in which to comply.

For businesses, this could be the next big compliance challenge following the Affordable Care Act. So it’s concerning that many employers are not fully prepared to navigate the new rules.

According to ADP research, only 25 percent of small businesses owners and 50 percent of midsized employers said they’re aware of and taking actions to comply with the new overtime regulations.* That means many of those businesses could potentially face substantial penalties down the road for noncompliance. Last year alone, Seyfarth Shaw estimates that the number of wage and hour lawsuits rose nearly eight percent to 8,781 cases.

Here are a few steps businesses should take now to prepare.

Ensure compliance with existing rules. Review existing employee classifications to ensure that your “exempt” employees are properly classified under current rules. For example, this means that employees who receive less than $455 per week are considered “non-exempt” and must be paid at least minimum wage and overtime.

Identify which employees meet the administrative, professional, or executive exemption. Figure out which employees are exempt and currently earn at least the current minimum of $23,660, but less than the proposed minimum of $50,440 per year. Determine how many hours these employees typically work per week and be sure to factor in any fluctuations in hours during peak periods.

Compare the costs of raising employees’ salaries. Weigh the costs of raising employees’ salaries to meet the proposed exemption criteria against what it would cost to reclassify them as non-exempt and pay them overtime when they work more than 40 hours a week. If an employee’s salary is closer to the current minimum ($23,660) and they rarely work overtime, it might make sense to reclassify them as non-exempt. Conversely, if an employee’s salary is closer to the proposed minimum ($50,440) and they frequently work overtime, you may consider raising their salary to maintain the exemption.

Consider the impact on internal pay equity. Beyond the costs of raising exempt employees’ salaries, consider the impact on internal pay equity. Internal equity means employees are paid fairly when compared with other employees within your company. If you substantially increase some employees’ pay, other employees may have questions about why their pay isn’t increasing. Also remember that if the automatic annual increases become final, you would need to review and adjust exempt employees’ salaries each year. Read more on CPA Practice Advisor.